Is Walmart’s move to Choice beef contradictory to its goals?

Walmart's decision to add Choice beef to the meat cases in all 3,800 of its U.S. stores is big news for American cattlemen, and it's likely to make many other retail grocers nervous.

Walmart has traditionally sold only Select grade beef, which fits with the giant retailer's low-price mantra. But Walmart has been buying Choice beef for the past three months, and that strategic shift has created an impact on the wholesale beef market.

Walmart's revelation about its buying habits in recent weeks also provides insight into the historically wide Choice-Select spread, which closed Friday at $17.38. In short, Choice beef is more expensive relative to Select beef.

The decision to add Choice beef at its stores was a response to customer demands for a broader selection of cuts, Walmart says. The company stressed that it is still offering Select beef for value-conscious customers.

Market analysts believe the addition of Choice beef is one of several new initiatives the company is taking in an effort to rebound from a dramatic U.S. sales slump – nine consecutive quarters of sales declines at stores open at least a year. Attempts to lure new customers who are not focused solely on price included an organic food initiative, and removing clutter from stores and offering more upscale merchandise. Those strategies apparently alienated some of Walmart's traditional customers.

New efforts to win back those traditional customers include more low-priced merchandise, and a renewed emphasis on sales of guns and fishing tackle. Last month Walmart executives said the company would end its long losing streak on Nov.15 when it reports three straight months on positive same-store sales.

Walmart's new initiative with Choice beef, however, may create a major impact on the U.S. beef market. Already the largest U.S. grocery merchant, more than half of Walmart's $260 billion in U.S. sales last year came from groceries.

On the production side, approximately 50 to 55 percent of carcasses graded Choice until about three years ago when the number of Choice carcasses began to increase. Early this year Choice carcasses represented about 67 percent of the total, a number that has slipped to about 63 percent in recent weeks. About 29 percent of carcasses are graded Select.

When the world's largest retailer, and the largest U.S. retail grocer starts buying Choice beef, the price of that product will increase. At the same time, producers should expect the price of Select to decline. In fact, over recent weeks the widening of the Choice-Select spread has been due more to the decline in Select prices than any increases in Choice prices.

In theory, Walmart's decision to offer Choice beef should be good for the industry. More product of higher quality offered to more people should mean increased sales and better profits. Yet, Walmart scares more than just their competitors – there are many Walmart suppliers that worry about their future should the Bentonville, Ark., giant suddenly switch directions.

For beef producers, Walmart's flirtations with the organic and sustainable food movement should be reason for concern. For instance, Walmart recently announced plans to purchase and sell $1 billion of food grown by one million small and medium sized farmers around the world. The company also says it plans to double its sale of locally-purchased produce in the U.S. by the end of 2015.

One might argue that Walmart's move in to the Choice beef market is contradictory to its goal of supporting so-called sustainable foods. But the company says it plans to "produce more food with fewer resources" as part of its commitment to global sustainable agriculture.